Corporates Quarterly Summer 2009

Aug 3, 2009 | Publisher: DebbieJoseph | Category: Business & Jobs |  

Inside this issue: Corporates Quarterly Summer 2009 In the Spring 2009 issue of Corporates Quarterly there was an article entitled 'The worst of times can be the best of times' which argued that under-geared, performing businesses might believe the time was now right to look at acquisitions, since current conditions meant businesses might be bought relatively cheaply. However, good news for buyers translates into bad news for sellers. The owners of well-managed, profitable businesses that are still trading within their current facilities might therefore be forgiven for putting their exit plans to one side, in the belief that prices will improve at a later date. Clearly there are certain life events or circumstances that will always drive corporate transactions, regardless of the state of the market retirement, ill-health and divorce are obvious examples. But in the absence of these, should business owners be looking simply to trade on through and hope for an eventual upturn in company valuations? The answer to that question depends in part upon business owners' thoughts regarding the prices that were paid by acquirers during the boom years. Whether those businesses represented a 'bubble' or were a more realistic appraisal of underlying worth compared with current prices. Many market-commentators have opted for the former, and opined that we are unlikely to see such high valuations again anytime soon. However, for UK owners of businesses there is another important question they should be asking themselves what do they think might happen to Capital Gains Tax (CGT) rates in the years to come? The recent Budget announcement of plans to charge 50% income tax on earnings over 150,000 means the gap between income tax and CGT, which is charged at 18% (or 10% for those who benefit from entrepreneurs' relief on gains up to 1 million) has widened significantly. The Institute of Fiscal Studies estimates that the government faces a shortfall of 39 billion by 2015-16 under Mind the gap continued overleaf... Mind the gap 'Internal audit you're hired!'... The 'VAT package' and beyond - changes in VAT ...continued from page one present tax and spending plans1. The Bank of England Governor, Mervyn King, has warned against more borrowing, so the only way to plug the gap would be to drastically cut public spending or increase taxes, or a combination of the two. This is a situation that will have to be addressed by the next government, whatever its hue, and it cannot be beyond the realms of possibility that CGT rates (left untouched in the recent Budget) might be one area affected, through the imposition of higher rates or through the abolition of existing reliefs. The last time there were significant changes to the CGT regime, with the abolition of taper relief in April 2008, those changes were announced sufficiently far in advance to enable business owners to take action. Some accelerated the planned sale of their businesses while others made use of certain trust structures. However, there can be no guarantee that any future changes will be notified similarly far in advance. Therefore, it is vital that UK business owners focus not only upon the issue of how much their businesses are worth today versus what they might be worth in the future, but also upon where they think tax rates may end up. Ultimately, it is net receipts that matter, and if they believe that CGT rates are likely to increase at a faster rate than valuations, that might lead to a decision to sell sooner rather than later. 1Institute of Fiscal Studies Briefing Note BN83, 2009. Internal audit is often perceived as an activity reserved for 'large companies', and even reading the corporate governance reports for many smaller public companies there is often the throw-away line that..."the need for internal audit has been reviewed by the board but it is felt that the company is not of the size and complexity that merits the establishment of an internal audit function". However, with the current spotlight on corporate governance, and especially the responsible direction and leadership provided by the Board and by the Audit Committee, is it time for companies regardless of size or industry sector to step back and consider the need for some sort of internal review capability whether it is called 'internal audit' or something more relevant to the company's culture and organisation structure. An essential element of any sound governance process must be some form of independent assurance on the corporate risk management and internal control systems. In the past, the perception has been that external auditors provide checks and reviews in these areas, but with pressure on fees and a re-alignment of the scope of the external audit process, the company only receives assurance on the financial statements and the higher-level financial reporting controls. Consequently, there is a whole range of non-financial risk areas, including: strategic, operational, compliance, market and knowledge risks, that are managed and controlled internally but are often not subject to any form of independent review. How do you determine when you need internal audit? In today's uncertain and turbulent business environment, Boards and Audit Committees should have some way of obtaining comfort that the critical risks are managed and that the control environment is working as expected. However, in determining the need for some form of internal audit there is no magic formula and there is no size factor threshold that can be applied. The need for internal audit should come from:  a risk and control perspective: do senior management have a good understanding of the critical risks of the business and have they assessed the underlying control activities? this often leads to some uncertainty as to whether the internal controls in place are actually fit for purpose and are working properly  a business process perspective: could improvements be made to key business processes to help enhance revenues or save costs? again this often leads to uncertainty because no one has independently reviewed these areas. What do you need to do to set up a new capability? Based on both perspectives above, organisations of all sizes can gain a lot of tangible benefits from putting in place some form of internal audit, but the issue is: what do you need to do to come to this decision and establish a new capability that works for you? 'Internal audit you're hired!'... The 'VAT package' and beyond - changes in VAT HM Revenue & Customs (HMRC) has announced some administrative changes to the VAT regime which are due to be implemented during 2010. Below are the areas which will have the most widespread impact. VAT package: services and ESL Currently only UK businesses supplying goods to customers in the EC have to complete EC Sales Lists (ESLs). However, with effect from 1 January 2010 businesses engaged in supplying services to commercial clients will also have to complete ESLs. See paragraph 1. Whilst the ESL is not as complex to complete as a VAT return, it does represent an extra administrative burden. In order to ease the impact of this extra requirement, businesses should ensure that they have the information which is required to be declared on the form by the implementation date. The submission is likely to be the same as is currently required for those taxpayers that supply goods to customers in other EC member states, being the VAT number of the client, its EC member state code, e.g. France = FR, and the total value of supplies made to that client in the period in s. ESLs in respect of services will be due on a quarterly basis with the due date for submission being 14 days for paper returns and 21 days when filed electronically after the end of the period. ESLs for goods will be required on a monthly basis where the value of sales exceeds 70,000 in a quarter. The Budget also announced that there is to be a relaxation in the VAT rules in relation to 'work on goods'. Currently these are treated as being supplied where the work is carried out unless a simplification is specifically applied for prior to the work being invoiced. However, from 1 January 2010 the position will be that these services will be treated as a reverse chargeable by the recipient of the service. With effect from 1 January 2010 the following rules will apply to all services (including work on goods) with a few exceptions such as land related services and restaurant and catering services: 1. Supplies to business within the EC: no UK VAT chargeable, VAT declared by recipient of service under the reverse charge mechanism (whereby the recipient declares output tax and input tax simultaneously on its own VAT return). 1. Corporate governance framework Understand where internal audit fits in the organisation's overall corporate governance structure. 2. 'Audit needs assessment' Consider what you are looking to achieve from internal audit and how, when and where it will be performed. 3. Business risks and control systems Ensure that there is a clear understanding and record of the critical business risks and key internal controls in the business. 4. Internal audit plan Prepare an internal audit plan of activities - the plan should cover a 'balanced' range of workstreams, including:  core assurance areas (often governance, location or finance focused)  risk-based processes (assessing high risk controls)  IT and software systems (testing security and access controls). 5. Internal audit methodology Set out a summary of the methodology that will be applied, including reporting protocols, quality control and the potential use of tools and technology. 6. Performance review and on going development Establish regular routines that review and report internal audit key performance indicators ('KPIs') to demonstrate the value provided by internal audit service delivery and determine any areas to be developed. The essential area of tangible value to be gained from internal audit must be to identify opportunities to improve both business performance and corporate decision-making. Only then does it make sense for the Board to say: 'Internal audit you're hired!' As a guide, a simple six-step model to help ensure a successful set-up process is outlined below: continued overleaf... If you would like to contact the authors about any of the issues raised in Corporates Quarterly, please see the details below: Mind the gap Nicola Horton, Partner, Corporate Finance T: 020 7842 7287 E: 'Internal audit you're hired!'... Louis Cooper, Partner, Risk and Assurance T: 020 7842 7205 E: The 'VAT package' and beyond - administrative changes in VAT Arthur Blackburn, Head of VAT Group T: 020 7842 7369 E: Members of Horwath Clark Whitehill UK network Hartlepool 01429 234414 Isle of Man 01624 627335 The office in the Isle of Man is Horwath Clark Whitehill LLC and the office in Hartlepool is Horwath Clark Whitehill (North East) LLP. These are all separate, independent firms and not part of Horwath Clark Whitehill LLP. Accordingly, these firms cannot be held liable for the acts or omissions of each other. Horwath Clark Whitehill LLP Cheltenham 01242 234 421 Manchester 0161 214 7500 Kent Midlands - Maidstone 01622 767 676 - Kidderminster 01562 60101 - Tunbridge Wells 01892 700 200 - Walsall 01922 725 590 London 020 7842 7100 Thames Valley 0118 959 7222 Horwath Clark Whitehill LLP is registered to carry on company audit work by the Institute of Chartered Accountants in England and Wales and is authorised and regulated by the Financial Services Authority. We hope you find this newsletter of interest. If you have any questions about any of the topics covered, please call your regular Horwath Clark Whitehill contact. Alternatively please speak to David Mellor or Paul Fay on 020 7842 7100 or email them at or This information is published without the responsibility on our part for the loss occasioned to any person acting or refraining from action as a result of any information published herein. Horwath International Association is a Swiss Verein. Each member of the association is licensed to include 'Horwath' in its legal name but remains a separate and independent legal entity. July 2009 Horwath Clark Whitehill LLP. All rights reserved. 2. Supplies to business and other customers outside the EC: no UK VAT chargeable. 3. Supplies to non-business customers in the EC: UK VAT chargeable. Change of VAT rate After the painful implementation of the rate change on 1 December 2008 there will be another change upwards to 17.5% on 1 January 2010. In summary, the essential features of the change to services will be:  any work completed before 1 January 2010 will be subject to VAT at 15%  any work spanning 1 January 2010 can either be subject to VAT at 17.5% on completion or split between that portion up to 31 December 2009 (15%) and 17.5% thereafter  any work invoiced or paid for before 31 December relating to services after 31 December 2009 will be subject to VAT at 15%. Goods invoiced, paid for or delivered before 1 January 2010 will be subject to VAT at 15% based on some anti-avoidance provisions. These include; supplies between connected parties, and any prepayment over 100,000 (where this practice is not the norm) which will result in a supplementary 2.5% charge. Electronic VAT returns With effect from 1 April 2010 all businesses with a turnover in excess of 100,000 and newly registered businesses will be legally obliged to file VAT returns electronically. The first electronic VAT return to be filed will be for the quarterly VAT period ending June 2010. Our experienced and dedicated VAT Group can advise and assist you through these changes. ...continued from page three

Corporates Quarterly Summer 2009.pdf


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